San Diegans for Open Government v. Public Facilities Financing Authority of City of San Diego

         Fourth Appellate District, Division One D069751

          Superior Court San Diego County 37-2015-00016536-CU-MC-CTL

          Briggs Law Corporation, Cory J. Briggs, Anthony N. Kim; Higgs Fletcher & Mack, John Morris and Rachel E. Moffitt for Plaintiff and Appellant.

          Mara W. Elliott, City Attorney, David J. Karlin and George F. Schaefer, Assistant City Attorneys, and Meghan Ashley Wharton, Deputy City Attorney, for Defendants and Respondents.

          OPINION

          CORRIGAN, J.

         A citizens' taxpayer organization sued to invalidate certain contracts allegedly made in violation of Government Code section 1090. The question is whether Government Code section 1092 gives plaintiff the statutory standing to do so. We hold that section 1092^[1] does not provide plaintiff a private right of action because it was not a party to the contracts. The Court of Appeal's judgment to the contrary is reversed. The matter is remanded for further proceedings.

         I. BACKGROUND

         Under section 1090, government officials and employees cannot be financially interested in any contract made by them in their official capacity or by any body of which they are a member. The statute codifies the long-standing common law rule prohibiting public officials from having personal financial interests in contracts they form in their official capacities. (Lexin v. Superior Court (2010) 47 Cal.4th 1050, 1072.) Both the common law and section 1090 “recognize ‘[t]he truism that a person cannot serve two masters simultaneously.' ” (Lexin, at p. 1073, quoting Thomson v. Call (1985) 38 Cal.3d 633, 637 (Thomson); see also San Diego v. S. D. & L. A. R. R. Co. (1872) 44 Cal. 106, 113.) Section 1090 has a broad reach, prohibiting both direct and indirect financial interests in public contracts. (See Moody v. Shuffleton (1928) 203 Cal. 100, 103-105.) The penalty for a violation is substantial: The interested official must disgorge any profits earned, and may not recover any consideration paid, under the contract. (Thomson, at pp. 646-652.)

         Section 1092 provides that any contract made in violation of section 1090 “may be avoided at the instance of any party except the officer interested therein.” (§ 1092, subd. (a).) The dispute here revolves around the meaning of the phrase “any party.” Some background will provide context.

         In 2007, the City of San Diego issued bonds to finance the construction of Petco Park. In 2015, the City sought to refinance the remaining debt on those bonds. It adopted an ordinance and its Public Facilities Financing Authority (PFFA) passed a resolution authorizing the issuance of new bonds to accomplish the refinancing.^[2] Shortly thereafter, San Diegans for Open Government (plaintiff) sued the City and PFFA (collectively, defendants), asserting that aspects of the refinancing transaction violated section 1090 because at least one member of the financing team, which included both city employees and private organizations, had a financial “interest in one or more contracts for the sale of the 2015 Bonds.” Plaintiff claimed it was seeking relief “under Code of Civil Procedure Sections 860 et seq. and 1060 et seq.” The complaint asserted a single cause of action, alleging that the bond issuance violated provisions of the California Constitution, the City's charter and municipal code, and section 1090. Plaintiff sought a judgment declaring the bond transaction's approval unlawful and an injunction prohibiting defendants from acting to further the bond issuance.

         Plaintiff ultimately agreed to entry of judgment as to all allegations except the section 1090 violation. Defendants then argued that plaintiff lacked standing as to that issue, citing San Bernardino County v. Superior Court (2015) 239 Cal.App.4th 679 (San Bernardino). Plaintiff argued it had standing under section 1092 and Code of Civil Procedure section 526a.^[3] Plaintiff also mentioned it had timely filed its action under the validation statutes. (Code Civ. Proc., § 860 et seq.) The trial court ruled for defendants, concluding that section 1092 only confers standing on the parties to a challenged contract, and that plaintiff also lacked standing under Code of Civil Procedure section 526a. The remaining action was dismissed.

         Plaintiff appealed. In the Court of Appeal, the parties agreed that Code of Civil Procedure section 863 did not provide plaintiff an independent right of action to assert a section 1090 violation.^[4] As to whether plaintiff could proceed under Code of Civil Procedure section 526a, plaintiff argued that it could, while defendants argued subdivision (b) of that provision barred plaintiff's claims for relief.^[5]

         The Court of Appeal held that the term “party” in section 1092 means “any litigant with an interest in the subject contract sufficient to support standing, ” and that plaintiff possessed such an interest. (San Diegans for Open Government v. Public Facilities Financing Authority of City of San Diego (2017) 16 Cal.App.5th 1273, 1284 (San Diegans).) Because it found plaintiff could pursue its claim under section 1092, it did not decide whether plaintiff could proceed under Code of Civil Procedure section 526a. (San Diegans, at p. 1285, fn. 4.)

         II. DISCUSSION

         A. General Rules Regarding Standing and Causes of Action

         “Unlike the federal Constitution, our state Constitution has no case or controversy requirement imposing an independent jurisdictional limitation on our standing doctrine.” (Weatherford, supra, 2 Cal.5th at pp. 1247-1248.) Typically, to have standing, a plaintiff must plead an actual justiciable controversy and have some “special interest to be served or some particular right to be preserved or protected over and above the interest held in common with the public at large.” (Carsten v. Psychology Examining Com. (1980) 27 Cal.3d 793, 796.) This requirement has been relaxed in some contexts. For example, California courts have consistently held that taxpayers have standing to prevent illegal conduct by public officials despite the lack of a special interest or right distinct from that belonging to the general public. (See e.g., Weatherford, at p. 1248; Crowe v. Boyle (1920) 184 Cal. 117, 152; Mock v. City of Santa Rosa (1899) 126 Cal. 330, 345.)

         Though standing requirements are construed more liberally in litigation enforcing public rights, a plaintiff suing under a particular statute still must show that it is among those with “a statutory right to relief.” (Weatherford, supra, 2 Cal.5th at p. 1248.) Here, the question is whether plaintiff has a cause of action creating a right to relief under section 1092. “Whether a statute gives rise to a private right of action is a question of legislative intent.” (County of San Diego v. State of California (2008) 164 Cal.App.4th 580, 609; see also Boorstein v. CBS Interactive, Inc. (2013) 222 Cal.App.4th 456, 466.) The intent may be express or implied (Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592, 597 (Lu)), but either way “the Legislature must clearly manifest an intent to create a private cause of action under [the] statute” (id. at p. 601, fn. 6, citing Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 295). The burden of persuasion is with the party claiming a statutory right to sue. (Lu, at p. 601.)

         B. Plaintiff Cannot Sue Under Section 1092

         Section 1092 provides in relevant part that “[e]very contract made in violation of any of the provisions of Section 1090 may be avoided at the instance of any party except the officer interested therein.” (§ 1092, subd. (a).) Defendants argue the phrase “any party” includes only parties to the challenged contract. Plaintiff argues the phrase applies more broadly to embrace other interested persons and organizations like itself.

         The Court of Appeal agreed with plaintiff. It reasoned that the “important policy embodied in section 1090... will not be vindicated if public officials believe section 1090's substantive provisions may only be enforced by the very public officials or public entities who have violated the statute's provisions.” (San Diegans, supra, 16 Cal.App.5th at pp. 1283-1284.) “[A] public official's duty to avoid even temptation cannot be advanced by adopting a rule which limits civil enforcement to that public official or public entities controlled by the official.” (Id. at p. 1284.) The court also found that the “weight of authority” stood for the proposition that “standing to assert section 1090 claims goes beyond the parties to a public contract.” (Ibid.)^[6] Based on “that authority and the important and strict policy embodied in section 1090, ” the court interpreted “section 1092's reference to ‘any party' to include any litigant with an interest in the subject contract sufficient to support standing.” (San Diegans, at p. 1284.) This would include, according to the court, parties with interests sufficient to support standing under Code of Civil Procedure sections 526a and 863. (San Diegans, at p. 1285.)

         We read the statute differently. “We begin with the text of the statute as the best indicator of legislative intent.” (Tonya M. v. Superior Court (2007) 42 Cal.4th 836, 844.) The statute refers to a “contract made in violation” of section 1090, then provides that any such contract “may be avoided by any party except the officer interested therein.” (§ 1092, subd. (a).) The most natural reading of this language is that the phrase “any party” refers back to the contract; that is, any party to the contract can sue to avoid it. The use of the word avoid in section 1092 also supports this construction. Typically, we speak of a party to a contract avoiding its legal obligations thereunder. (See e.g., Rest.2d Contracts, § 7 [“[a] voidable contract is one where one or more parties have the power... to avoid the legal relations created by the contract”].) Indeed, the Restatement Second of Contracts notes that “[a]voidance is often referred to as ‘disaffirmance.' ” (Rest.2d Contracts, § 7, com. b, p. 20.) A non-party does not possess the power to affirm or disaffirm a contract. (Ibid. [“[u]sually the power to avoid is confined to one party to the contract, but [under certain circumstances] the contract may be voidable by either one of the parties”].)

         This conclusion finds further support in provisions of the Civil Code governing the formation and interpretation of contracts. (See Smith v. Fair Employment & Housing Com. (1996) 12 Cal.4th 1143, 1156 [reviewing the “Legislature's use of the words ‘marital status' ” in the Family and Probate Codes to determine the meaning of that word in a Government Code provision]; see also Pesce v. Dept. Alcoholic Bev. Control (1958) 51 Cal.2d 310, 312; Picayune Rancheria of Chukchansi Indians v. Brown (2014) 229 Cal.App.4th 1416, 1428.) Civil Code section 1559, for example, provides that a “contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” (Italics added.) In this provision, the Legislature uses the term “party” to refer to a contractual party, ^[7] as distinguished from a “person, ” who is not a contractual party.^[8] The careful usage of these terms in the Civil Code indicates that, when the Legislature uses the term “party” in a statute referencing a contract, it typically means a party to that contract.

         The San Bernardino court construed section 1092 in this fashion. There, two taxpayer groups attempted to rely on section 1092 and Code of Civil Procedure section 526a to avoid a settlement agreement between a county and a partnership after a supervisor who voted in support pled guilty to accepting bribes. (San Bernardino, supra, 239 Cal.App.4th at p. 683.) The trial court overruled the defendants' demurrer, which argued that the plaintiffs lacked standing. (Ibid.) The Court of Appeal reversed. Rejecting the plaintiffs' argument that they were entitled to sue under section 1092, the court reasoned that nothing in the statute's plain language “grants nonparties to the contract... the right to sue on behalf of a public entity that may bring a claim as provided in section 1092.” (San Bernardino, at p. 684.) Indeed, “the Legislature's choice of the word ‘party' in section 1092-as opposed to, say, ‘person'-suggests the Legislature intended only parties to the contract at issue normally to have the right to sue to avoid contracts made in violation of section 1090.” (Ibid.)

         Plaintiff argues the term “party” in section 1092 should be read to include persons who are not parties to the challenged contract. Plaintiff argues section 1092's exception, which prohibits “the officer interested therein” from suing to avoid a contract (§ 1092, subd. (a)), supports its construction. Because the agency, not the officer, would normally be the party to the contract, there would have been no reason according to plaintiff for the Legislature to create this exception unless the term “party” includes those who are not parties to the contract.

         This argument is easily rejected. To be sure, on the government's side, the public agency typically would be the contractual party. But the financially interested officer could of course be one of the other parties to a challenged contract. In County of Shasta v. Moody (1928) 90 Cal.App. 519, for example, the defendant owned a printing business and was also a county supervisor. While the defendant held that public office, “he did printing, advertising, job work and sold supplies to... various county officials of the county of Shasta, including the board of supervisors, ” and was paid for that work. (Moody, at p. 520.) In other words, the county was one party to the contract that allegedly violated section 1090, and the financially interested officer was the other party to that contract. (See also Berka v. Woodward (1899) 125 Cal. 119, 121.) The exception prohibiting suit by an interested officer would prevent that officer from suing on his or her own behalf, as a contractual party, to avoid the contract. Thus, the phrase “any party” need not be read to include nonparties in order for that exception to make sense.

         Plaintiff also argues the term “party” could be read to include a party to litigation concerning the contract. Plaintiff points out that, in the article of the Government Code in which sections 1090 and 1092 are found, ^[9] the word “party” is followed by the qualifier “to any proceeding” on one occasion (§ 1091.4, subd. (b)) and by the qualifier “to litigation” on another (§ 1091, subd. (b)(15)). Plaintiff urges that the use of these qualifiers shows the term “party” has a broader meaning in this context and includes persons other than the contractual parties.^[10]

         These textual arguments fall short. As mentioned, the sentence in which the phrase “any party” appears begins by referencing a “contract made in violation” of section 1090. (§ 1092, subd. (a).) The word “party” may not be directly adjacent to the qualifiers set out above, but it is most natural to read that word as referring back to the contract mentioned at the beginning of the sentence. Indeed, the Legislature may have thought it unnecessary to qualify the term “party” in section 1092, subdivision (a), because that subdivision already references a contract made in violation of section 1090. To add the qualifier “contracting” to the phrase “any party” in section 1092 arguably would have been redundant.

         In any event, the ultimate question is whether the Legislature has clearly manifested an intent to create a private right of action. (Lu, supra, 50 Cal.4th at p. 601, fn. 6.) If the Legislature has clearly expressed an intent one way or the other, “that usually ends the inquiry.” (Animal Legal Defense Fund v. Mendes (2008) 160 Cal.App.4th 136, 142.) If it has “expressed no intent on the matter either way, ... there is no private right of action [citation], with the possible exception that compelling reasons of public policy might require judicial recognition of such a right.” (Ibid., citing Moradi-Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d at pp. 304-305.)

         Here, the Legislature has clearly expressed an intent that parties to public contracts may sue to avoid those contracts under section 1092. As to nonparties, however, there is no such clear expression of intent.^[11] Accordingly, we cannot find that plaintiff has a private right of action unless there are compelling policy reasons to do so. Those reasons do not exist here. The Court of Appeal based its interpretation of section 1092 on both case law and the necessity of vindicating the policies embodied in section 1090. Neither reason compels us to read an intent into the statute that does not appear on its face.

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